Shriram Transport Finance Corporation NCD Issue

This article is written by Shiv Kukreja

Shriram Transport Finance Corporation will be launching the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue size is Rs. 600 crore including a green-shoe option of Rs. 300 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements. The issue closes on August 10, 2012.

The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively. What the company has done to make these NCDs attractive for the individual investors is that they will be offered an additional 0.90% p.a. making it an annual coupon rate of 11.15% and 11.40% respectively. This means even if an individual investor buys it from the secondary markets they are going to get 11.15% or 11.40%.

Many of you must have remembered that the company came with a similar kind of issue last year also. Bonds issued last year are currently yielding 11.07% under the 60 months reserved individual option and 12.23% under the 36 months reserved individual option. So, going by these yields, 11.40% and 11.15% is actually attractive for the individual investors.

The investors will have the option to get the interest either paid annually or at the end of the tenure along with the principal. Under the cumulative interest option, retail investors will get Rs. 1,716.15 after 5 years and Rs. 1,373.19 after 3 years for every Rs. 1,000 invested. For all other investors, these amounts stand at Rs. 1,647.90 and Rs. 1,340.10 respectively.

The interest earned would be taxable but the company will not deduct any TDS on it as is the case with all of the listed NCDs. The issue keeps a minimum investment requirement of Rs. 10,000 (or 10 bonds of face value Rs. 1,000) which seems reasonable from the small retail investors’ point of view.

These bonds will offer reasonable liquidity to the investors as they are going to list on both the stock exchanges – NSE and BSE. Unlike last year, the retail investors will have the option to apply these bonds in physical form also. All the remaining investors will have to subscribe these bonds compulsorily in demat form only.

40% of the issue is reserved for the Reserved Individual Category i.e. for the individual investors investing up to Rs. 5 lakhs and another 40% of the issue is reserved for the Non-Reserved Individual Category i.e. for the individual investors investing above Rs. 5 lakhs. 10% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue.

Shriram Transport NCD July 2012
Shriram Transport NCD July 2012

A slew of NCD issues had hit the markets last year when companies like Shriram Transport, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest, India Infoline Investment Services etc. came with approximately ten such issues. I must tell you, except Shriram Transport NCDs, all other NCDs listed at a discount and that too at quite a deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They must be yielding higher than 13% even now.

But Shriram group is a quite stable group and the issue has been rated ‘AA/Stable’ by CRISIL and ‘AA+’ by CARE suggesting that these bonds are reasonably safe to invest. Unlike last year, there are no put/call options available either to the investors or to the company.


Introduction to liquid funds

Liquid funds are getting increasingly popular these days because of the high interest rates, safety, and tax advantage that they offer.

Liquid funds invest in treasury bills, government securities, call money, repo and reverse repos and other such instruments that are quite safe in nature and have a short maturity. This means that they are good for parking that part of your money that you would have otherwise put in a bank savings account.

There are a large number of liquid funds available in India and to give you an indication of the returns they have generated in the past few years, I took the returns of 3 funds that were rated high, medium and low for the long term by Value Research.

You can see those returns in this chart.

Sample Liquid Fund Returns in India
Sample Liquid Fund Returns in India

As you can see, last year has been particularly good for liquid funds, and that is beginning to show in the fund inflows as well. ET reports that during the month of May 2012, liquid funds had the largest inflow of funds in any category and got over Rs. 25,000 crores.

Liquid Fund Tax Benefits

Liquid funds are taxed long term capital gains at 10% without indexation and 20% with indexation. The short term capital gains are charged at the marginal tax rate of the investor and the dividend distribution tax is charged at 25% but that’s in the hands of the fund house and not the investor, so the returns that you see in the chart above have taken care of that.

In general, liquid funds do not have exit loads, and the ones that I checked showed this to be true, however I’m not sure that this is true across each and every liquid fund that exists in India.

Liquid Funds versus Savings Account

It used to be that liquid funds were a lot better than savings accounts because their returns were higher than savings account interest rates and they were taxed at a lower rate than the savings account interest income.

While this is still true, two things have reduced their advantage in recent times.

The first one is that savings bank rates have been liberalized and you can get 6% or so in a savings bank account now, and secondly, bank fixed deposits for short periods like 3 months can now give you as much as 8.25%, and you can always move some part of your emergency funds to these short term deposits especially when a lot of these can be opened electronically and don’t have a penalty when you break them.

I feel that liquid funds definitely have a place in your portfolio if you are in the higher tax bracket but you can’t focus too much on it because the absolute difference that you get by investing in a liquid fund versus a savings bank account shouldn’t be a lot. If it is a lot, then you have to ask yourself where else you can invest this money for a longer duration to get better returns.

This post was from the Suggest a Topic page

ICICI Prudential US Equity Bluechip Fund Review

ICICI Prudential has launched a new mutual fund called the ICICI Prudential US Equity Bluechip Fund which will invest in stocks of American companies, and I think this is just the second fund after Motilal Oswal’s NASDAQ 100 ETF that allows Indians to get exposure to US equities using a fund vehicle.

A look at the chart of the Motilal Oswal’s NASDAQ 100 ETF’s performance overlapped with the performance of NASDAQ itself helps drive home a very important point that you must keep in mind before investing in any fund that invests in the American market.

NASDAQ versus Motilal N100
NASDAQ versus Motilal N100

The big thing that you see from this chart is that even though the NASDAQ only grew 7.4%, the index fund based on that grew a whopping 37.8%!

Most of these gains are due to the currency rate movements and Rupee’s depreciation in the recent past has really helped this fund show the kind of returns that it has. Kapil Visht has done an analysis of Motilal Oswal’s NASDAQ fund to show the relationship between Rupee movement and fund performance and that is worth a read as well.

Simply put, if the fund had 100 crores in INR and the USDINR rate is Rs. 50, you can buy USD 2 crore or 20 million dollars worth of shares. But when the same rate moves to 57, and you sell those 20 million dollars worth of shares you get 114 crores in Rupees.  You can use the rupees crores to million dollars calculator that I developed some time ago to see how this works.

This is an important point that you need to consider because it is not quite intuitive how big of a difference these currency rate movements can make, and you might feel that over a longer period they may not make a difference, but at least so far that hasn’t been true, and I think that’s going to continue for some time to come due to the Rupee volatility that we have seen in the past couple of years.

PP commented earlier in the day what would happen if the Rupee were to appreciate which it eventually will and I would say that there is no guarantee that the Rupee will or should appreciate and you can’t take that for granted. For people who remember 39 Rupees to a Dollar, they thought that it would go back to 39 once it hit 45, but it hit 50 instead and I’m sure there were a lot of people who thought this would go back to 45 but look where we are today.

However, if the Rupee were to rebound and American market were to remain flat or go down then you will make losses on your investment.

You can see this simply based on the above example where you have 20 million dollars worth of shares, and instead of selling it now, you hold them for a year when the Rupee rebounds to 45. In this situation your 20 million will just be able to buy 900 million rupees or 90 crore rupees and you will be left with a loss of 10%.

Now, the offer document does say that they are going to try and employ currency hedging but it doesn’t go into a lot of detail so you will have to wait and see what this really means and see how it actually plays out.

Now let’s look at some other aspects of this fund.

ICICI Prudential US Equity Bluechip Fund Is An Actively Managed Fund

This is an active fund and not an index fund, the benchmark is the S&P 500 and the fund will buy stocks only in companies that are listed in NYSE or NASDAQ. In their review of the ICICI Pru US Equity Bluechip Fund, Business Line says that the fund will invest in 20 – 25 stocks and I think that was mentioned at the press conference.

This is not a fund of fund

The good aspect of the fund is that it will invest directly in equities so there won’t be any double fees. There have been some international funds that have been fund of funds so this is also an important thing to keep in mind.

Expense Ratio

The expense ratio that’s mentioned in the fund document is 2.5% and this is pretty high, it remains to be seen whether they actually charge this much but 2.5% is a bit high for any fund.

Open and Close Dates and SIP Amounts

The NFO opened on June 18 2012 and will close on July 2 2012, and the minimum application for NFO is Rs. 5,000 and then for the SIP the minimum amount is Rs. 1,000. Regular readers know however that there is no benefit of investing in the NFO of a mutual fund.


This is an interesting product and and it is good that fund houses are coming up with funds that invest directly in American markets but the expenses seem to be high and it’s a lot better to have a passive index fund that’s low cost than an active fund with higher cost.

In two or three years there will be plenty of funds in this category and then perhaps you will have lower cost options but till then if you wanted to take exposure to the US markets then this is a viable option along with the Motilal Oswal NASDAQ fund.

This post was from the Suggest a Topic page.

India’s $10 billion pledge to IMF: Facts and Fiction

It’s not often that I discover breaking news through my Facebook feed, but that happened today with the news of India’s $10 billion pledge to IMF going viral and people taking some pretty extreme positions in the comments to each other’s posts.

The press release from IMF about this is fairly detailed and let me present two quotes from Ms. Lagarde  that I think are the most important to consider when you’re trying to figure out what to make of this news.

Here is the first quote (emphasis mine):

“We warmly welcome pledges by our members to increase IMF resources by over $430 billion, almost doubling our lending capacity. This signals the strong resolve of the international community to secure global financial stability and put the world economic recovery on a sounder footing. These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed, and if drawn, will be refunded with interest.

So, you see, the impression that some people have got (and I was part of this group initially) that India is just giving away $10 billion is wrong. It is an interest bearing loan, and is not a donation at all.

I think the problem is that most newspapers reported this as “aid” and that word usually connotes some kind of donation or charity, but as you can see this is not aid in the same sense that most people think about it. You don’t expect to be paid back with interest if you donate money to charity.

Now, to the second quote (emphasis mine).

“These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed as a second line of defense after resources already available from quota and the existing New Arrangements to Borrow are substantially used. If drawn, they will be repaid with interest. The IMF is committed to assuring our members’ interests and resources are safeguarded.”

This means that they have to first use up money from the quota and something called the “New Arrangement to Borrow” and only then can they go to this additional funding.

India is part of the quota but is it part of the new arrangement to borrow? Those details are present in this page, and you will be surprised to learn that India’s name figures there and the number is not small either at $8.74 billion. If you’re worried about the $10 billion, you should be more worried about this $8.74 billion because this will get used up prior to the 10 billion.

I think looking at these two quotes help a great deal in getting a clear picture on the announcement that’s made today.

Almost 3 years ago, Dr. Manmohan Singh had said that India is ready to contribute to IMF based on its quota (I had blogged about it then) and this is an extension of that to the extent that India wants to have a greater say in the workings of the IMF along with other emerging economies and these type of steps will help it get that larger say. India’s current voting right is 2.34% and that’s up from the 1.89% that it had 3 years ago.

It is also notable that India is not alone in pledging this money, and here is a chart that shows other countries who have pledged as much or more than India in order to boost IMF’s resources. (Data Source)

Countries that have pledged USD 10 billion or more to IMF
Countries that have pledged USD 10 billion or more to IMF

India was lucky to get IMF support in 1991, not only because of the money that came from IMF but also because of the conditions that came with it as they truly helped usher in the first round of liberalization, and the present generation owes their higher standard of living in a large part to that first wave of liberalization.

It’s only natural then that India plays its part to support the IMF today when the world is even more inter-connected, especially when it is in the form of loans that will eventually be repaid along with interest.

How to file your taxes online using the Income Tax India website?

Vikrant commented on the Perfios post last Friday on how easy it was to register and file taxes on the Income Tax India website if you have income from only one source viz. salary, and that it took him only 10 minutes to file his own taxes this way.

I’m not familiar with this process, so I asked him if he would share his experience and he replied very promptly with the steps involved in this process.

Here are the instructions that he gave me (slightly edited).

It’s very simple, especially for people like me who have only one source of income which is salary income.

1.  Go to

2.  You need to register first, and that’s done by clicking on the Register link that’s present on the right side of the screen, and supplying your PAN.

3.  Once registered, enter your PAN number and password to login.

4.   After you login, you will find a page where you can choose to file return for this year or previous year, Let’s take an example of this year. When you point your mouse to E-Filing A.Y.2012-13 it would prompt: “Individual, HUF” as shown below.

Click on the “Individual, HUF” link.

5. The next page has a set of instructions on which form you should use for your tax filing. These are fairly detailed instructions, and you can easily make out which form you should use based on the details given there.

Here is a screenshot of the instructions.


If you look at this page, it will tell you what which ITR form you need to use. Based on the kind of income you have, you will need to use the respective form like ITR1 , ITR2 and so on.

As I said, I will use ITR 1 as example as I come under Income from Salary/Pension .

6.  Click on the Excel Utility (Version 1.0) for ITR 1 and similarly for other ITR whichever is applicable to you.



7.  Fill this form based on the information present in form 16 and validate that.

8.  Once you have filled the form (there are 4 pages you need to fill; all those which are applicable). Click on validate and then click on Generate. This will generate a XML file which would be saved automatically in the same location where you had saved the excel file that you downloaded.

9.  Once the XML is generated, all you need to do is, click on the > Select assessment year on the left hand side of the web page and select the year assessment year, which would be AY12-13 for this year.

10.Once you click on AY 12 – 13  you will find this page.



Select the option accordingly, like I have done here and click next

11.Once you click next you will find another page that looks like this.



Click on Choose file and select the XML file  that got saved when you generated the XML. And click upload.

12. You will get an email from income tax office that will have a PDF file called ITRV. Take a print out, sign on the form and send it to the address mentioned on the file by ordinary post or speed post.

It’s all done! It’s a very simple process if you have income from only one source.


Vikrant’s instructions are fairly detailed and it looks like a simple process by the looks of it. Many thanks to him for sharing these with everyone here!

Has anyone else tried this and if so what is your experience?

A holistic look at petrol price taxes and oil company subsidies

Petrol prices have been in the limelight for quite a few days now, and people are naturally concerned about the rise in prices. While no one denies that if international crude prices go up, India has no option but to raise prices, a lot of people feel frustrated with the high taxation that is present in petrol prices.

The petrol pricing structure is so convoluted that it is hard to understand how all the pieces fit together, and I’ve tried to answer some questions that help take a holistic view of the situation.

How big is the subsidy?

Reuters reported a few days ago that the total fuel subsidy is Rs. 1.38 trillion this year, and the budget said that the total subsidies are going to be Rs. 1.90 trillion so you feel that the fuel subsidy is about 73% of the total subsidy bill of the government. However, this percentage is not accurate because the government doesn’t bear all the subsidies. The upstream oil companies will bear 40% of these and we’ll talk about them in detail later on.

How does this Rs. 1.38 trillion number compare to revenues? The total tax revenue for this fiscal is expected to be Rs. 7.7 trillion so the subsidy is about 18% of the total tax revenue.

This is huge of course, and leaves no doubt that this problem is very real and not an eyewash by the government.

The under recoveries on oil products makes a huge hole in the government’s pocket that has to be filled up some how and to understand how it is filled, we need to look at the four major players in this equation. First, the two type of oil companies.

Upstream and Downstream Oil Companies

You will normally hear of oil companies as either upstream companies or downstream companies. Upstream companies are involved in the exploration and extraction of crude oil and downstream companies are involved in selling and distribution of  oil products to end customers, these are also called oil marketing companies.

The oil marketing companies – Indian Oil (the biggest of the lot), HPCL (Hindustan Petroleum Corporation) and BPCL (Bharat Petroleum Corporation Limited) buy crude from downstream companies and then sell that at discounted rates, and in the process they incur huge losses.

These losses are subsidized by the government directly in the form of cash subsidy, and grants and by upstream oil companies – OIL (Oil India Limited), ONGC (Oil and Natural Gas Corporation) and GAIL (Gas Authority of India Limited). There is no fixed formula for deciding any of this, and periodic announcements tell people what the subsidy is going to be and who is going to share how much.

If you’re worried that the oil companies are screwing you, well, Indian Oil is India’s biggest company by sales, and it couldn’t even make a profit if it weren’t for the government grants, well that’s true for all oil marketing companies.

In fact, here is a chart based on data from IOC press release that details out how much profit oil marketing companies made last year, and how much assistance they got. The numbers speak for themselves.

Profit of Oil Marketing Companies and Assistance Given To Them
Profit of Oil Marketing Companies and Assistance Given To Them

Now, let’s look at the other two players.

Central and State Governments

The central and state governments come into play because of the taxes on petrol. There are many different forms of taxes, and I’m listing below the ones I could find. There may be others.

Excise Duty

There is excise duty which is Rs. 14.45 per liter regardless of price of petrol and there were some noises earlier that the government might reduce excise duty to bring down the price of petrol but that never materialized.

VAT / Sales Tax

There is VAT as well which depends from one state to the other and Goa reduced this by Rs. 11 or the entire 20% in March this year. Then there is Sales tax and Entry tax in some states and I found a link which says that these amount to Rs. 19 in Karnataka. The rate of Sales tax / VAT which varies from 15% to 33% on the states.

Customs Duty

There used to be a 5% Customs duty on crude oil but that was eliminated last year due to the heavy under recoveries faced by the oil companies.

Import Duty

There is however a 2.5% Import duty that is levied on crude oil which was reduced from 5% to 2.5% two years ago, and there were some murmurs that it will be reduced to zero but that didn’t happen.

Here is a chart that shows how much do taxes roughly account for as price of petrol.

How much do taxes contribute to petrol prices?
How much do taxes contribute to petrol prices?

Before you go on to say the taxes are very high, keep in mind that the government is running huge deficits, and if they reduce taxes they have to raise money from somewhere else, so it’s not a conspiracy by the government but a stark reality that the money has to come from somewhere. Having said that, with only 3% of the people paying taxes and huge under reporting going on in tax payments everywhere, petrol is not the only place where this money can come from. There are several other sources as well.


We have a very unusual and complex environment where diesel, LPG and Kerosene are hugely subsidized, cause a lot of losses to oil companies but it’s hard to decontrol their prices because of the “poor people” argument which it is quite hard to see how much of that is true, especially when you see pricy luxury diesel cars plying the road.

Then there are these companies that would have been making losses had it not been for government grants, but incredibly enough, they pay dividends too! The government gives them grants, and then they pay out dividends, and it has all gotten incredibly messy and hard to understand.

It doesn’t help that petrol is taxed so much and that can create an illusion that the government is stuffing people with these high prices.

I think it is best to look at all these players as separate entities if you really want to understand the situation rather than just lumping them together and calling them the big bad evil government.

GDP growth falls to 6.5%

In what seems to be a one way slide, India’s GDP growth slowed down yet again with both the quarterly and annual numbers coming out lower than last year’s comparable period.

This has been a sad story for quite a while now, and that the growth in the current fiscal is even worse than the 2008 – 09 period where the global economy was close to falling off a cliff shows that India’s growth story and the dreams of a demographic dividend are turning into a nightmare.

Here is a chart that shows the GDP growth from 2002 till date.


India Annual GDP Growth 2002 - 2012
India Annual GDP Growth 2002 - 2012

As you can see – the worst year in quite some time was 2008-09 when the sub-prime mortgage crisis in the US shook the whole world, and last year’s growth is even worse than that!

Imagine what would happen if the Euro crisis gets worse and the economy gets another shock from there – it won’t be surprising if the GDP growth for this year dips under 4% if that were to happen.


The role of exchange rates in gold prices

You don’t think about currency exchange rates when you are buying gold because the two are generally not talked about together, and most people buying jewelery would perhaps be surprised to hear that the exchange rate has any bearing on gold prices at all.

However since India, and much of the rest of the world imports most of their gold for which they have to pay in a foreign currency, the price of gold domestically is impacted by the exchange rate much like the price of oil.

A good way to visualize this is to see how gold prices moved in 2012 priced in different currencies.  (Data from GoldPrice)


Gold price movement in 2012
Gold price movement in 2012

Part of this price difference is exchange rate, and part of it is domestic demand and supply, but I think it is really hard, if not impossible to distinguish which is which.

I think the relationship between USD INR and gold prices is going to be talked about a lot in the next few years because the Rupee has become a floating currency and it will continue to move a lot and gold is becoming more of a financial asset than anything else and that will mean that the demand also depends on people’s appetite of gold as a financial asset instead of just jewelry.